The Oxen Report: Long Term Position to Finish Out the Week

August 27, 2010

120

Our Long Term virtual portfolio is starting to really come together and look very solid. We have a nice mixture of speculations in the solar industry, autos, blue chips, and even a movement into the fast food industry. The key to long term is that we want to find industries and companies that the potential to grow over the next year, two years, three years. One such industry that is going to be in heavy demand from a standpoint of a post-recession need is employment services. Today, we take a look at a company that will grow with the return of jobs, similar to a Paychex (PAYX), which we already have in our virtual portfolio. This company though gives us an even more direct affiliation with a growing employment field.

Long Term Position: ManPower Inc. (MAN)

Profile

ManPower Inc. (MAN) is an employment services firm that offers help to employees for temporary work, full-time employment, and other employment recruitments in a number of countries: the USA, Canada, the Netherlands, Germany, England, South Africa, and Hong Kong. The company was founded in 1948 in Milwaukee, WI. The company has 4,000 offices in 83 countries, and it staffed 3,000,000 people in 2009 to its 400,000 company client list.

Thesis

In the USA, the media has literally scared that no one will ever get a job. We will all be unemployed forever. This just is not the case. While trusting the government may be hard to do, there is one thing I know about them. They love their power. They love being in charge, and the only way for them to retain that power is by making the voters happy (I apologize for the government rant, but a few of my readers are skeptics). The above chart is an estimate on the unemployment rate through 2015 down to 5%. Employment is on its way in the USA and the world. That is one of the best aspects of ManPower. The company is well diversified.

The thing about ManPower is that the company was hurt by job cuts and a period of no reemployment. As employment starts to come back to many corporations, MAN will benefit greatly. The company is the middle man between the employer and the unemployed, and they sit very nicely to be at the front end of the reemployment of the USA. Additionaly, the company is not just situated in the USA. They have a large part of their revenue stream in Canada, the Netherlands, Germany, England, South Africa, and Hong Kong. In the following countries, the unemployment rate has topped off and is declining. In Canada, the rate dropped from 8.5% at the beginning of the year to 8.0%. In the Netherlands, it has dropped from 5.7% to 5.5%. In Germany, 10% to 9.5% and England 9.2% to 7.8%. Hong Kong continues to grow significantly, and while South Africa is currently in a rut, the country’s future looks bright.

So, the picture is getting brighter in many of the places MAN does business. While in the latest month we have seen a slow down in our recovery, this should be expected. We cannot race to recovery without taking some steps back as the cyclical nature of any upward trend takes hold. The long term path is still up for employment. MAN is starting to see a great recovery from 2009 bottoming.

The company has in Q1 and Q2 combined to already surpass its entire 2009 operating income. The company has been able to improve itself with not only full time employment but also temporary employment.

CEO of ManPower, Jeffrey Joerres, commented that "there’s a classic sequence to economic recovery. The first thing that comes back is hiring in temporary workers and contractors. This time, because of the slowness of the recovery and uncertainty about the economy, that stage has lasted much longer."

Yet even temporary employment is very profitable for ManPower. The company benefits from every placement of temporary workers, and they act as an outsourced human resources firm that provides companies with temporary candidates that fit into what the company needs. As companies are not sure how the economy is going to fair exactly and are worried that demand will fall off or not increase at significant levels, they are keeping temporary workers employed until they can be sure they are needed full-time.

Harm Bandholz, chief US economist at UniCredit, comments "Temporary workers are just substituting permanent hires, not preceding them, because companies still don’t trust the strength or viability of the recovery…from October to January, employees at staffing agencies like Manpower and Robert Half International grew at the fastest pace on record."

The company is looking very strong entering what should be a worldwide global recovery. The company, despite the media, is very excited about Europe and is seeing great revenue growth in many European nations and is also excited about growth in Mexico. The company doubled its net income in the latest quarter and saw revenue rise 21%. Yet, the company is just on the cusp of recovering to a 2008 level, when the company made $21 billion in revenue. This year, the company is estimated to pull in near $18 billion. In 2008 in a shrinking employment market in the USA and Europe, the company was making $3 billion more than this year. 2011 should be an exciting year, and that excitement should continue into 2012 and further.

And what is really so wrong with the American recovery. For the first seven months of the year, the private sector has added jobs not lost any. Companies are adding jobs, whether it is temporary or full. Temporary is actually better for MAN as it makes its quantity higher. Looking across the USA, the picture is not so bleak. In the Denver area, 19% of companies are planning to add jobs in Q3 to 8% planning cuts. In the Houston area, 20% of companies are actively hiring. Birmingham has 15% of its employers looking to hire in Q3. Hiring is happening and it will continue to happen. Companies have amassed a large amount of free cash in these hard times, made their businesses smarter, and cut jobs. Now that a recession is over, they are starting to recover, slowly but surely.

ManPower is at the forefront of this employment, but they face a number of risks. For one, the company faces tough competition in a market that is hard to create much of any economic moat. The company has created a small one through its sheer power. They have been able to become an outsourced human resources firm for many companies, but they still face competition from Robert Half International and online companies, such as Monster.com, Careerbulider.com, and ladders.com. Additionally, smaller head hunters cut into their business. Further, the company needs recovery and employment to continue to grow in order to be successful. A slowdown or double dip recession would be very hurtful to this company. Additionally, the company believes that there is an unskilled labor force out there without the proper vocational training for jobs like plumbing, electricians, carpenters, etc. The discrepancy between openings and skilled labor workers threatens the company and economies.

Despite these risks, I believe the company has very great upside. They maintain a very strong balance sheet with great cash flow and strong margins, and they have a strong future.

Valuation: I have a fair value estimate for MAN at $75. With a current price at $44, the stock has just under 75% growth possibilities. On a discounted cash flow analysis, I was very mild in my estimates for the company with very mild growth in operating income from $220 million to $260 million in 2010 to 2011, hitting $800 million by 2015, which is still below 2007 levels when the economy was blazing. Basically, this assessment is saying that in five years we still will not be at 2010 levels. This is a fairly mild valuation, and even with this growth, I still see the stock growing in value as its earnings will increase, and its price will go with it.